Mortgage Rates: Tiny Houses Gain Popularity

The small house movement is increasingly with us. Call them small, tiny, wee, mini , micro or petite, there seems to be a growing interest in homes that are not much larger than a garage or two, say 500 square feet or less.

Small Is Big

Why the interest in tiny houses? Several arguments in favor of mini-mini-mansions stand out:

First, they cost less, a lot less. The Internet is filled with stories about people who paid anywhere from $5,000 o $40,000 for a home of their own. How little is this? The National Association of Realtors reports that the typical existing home sold for $199,500 in October.

Second, they require a lot less care and attention. In fact, they easily meet the basic standard for residential living established under Miller's First Rule of Real Estate: Never buy a home you don't want to clean.

Third, small houses may be a partial solution to the housing shortage in major metro areas, places where land is at a premium. Odd pieces of vacant space that cannot accommodate a modern house may be perfect for a house not any bigger than a mobile home or trailer. With a small house it may be possible to live at a great location which would otherwise be impossible to afford.

Fourth, small houses may be an alternative to a choice which is getting old for many in their 20s and 30s -- living with mom and dad. A small house may be tiny but at least it offers privacy and separation.

Square Feet Versus Family Size

"Age plays an important role in a buyer’s preferences," says the National Association of Home Builders, "with the amount of space requirements dropping steadily as the age of the buyer increases. Among those younger than 35, the desired home size is 2,494 square feet, compared to 2,065 square feet among those 65 and older."

The catch is that American have historically done well with far-smaller homes.

In 1950 the typical home had just 983 square feet versus 2,320 square feet in 2002. While homes long ago were much smaller than today, family sizes were larger: In 1950 the typical household consisted for 3.37 people, a number which fell to 2.58 people by 2002, according to the Census Bureau. In effect, household size has grown from 292 square feet per person to 899 square feet, a huge increase.

Tiny House Financing and Mortgage Rates

Not all small homes are alike. Before committing to such a property, buyers (and self-constructors) must be certain that construction meets all zoning and building code requirements. In particular, in some locations proper sewage hook-ups can be a tough issue.

Financing for small homes may be readily available from several sources. For instance, under Title II the FHA insures loans for homes that have at least 400 square feet.

Such financing tends to have higher mortgage rates than loans for regular residential financing because the lender has fixed costs to cover whether a mortgage is large or small. However, because loans for tiny houses are so small even with higher mortgage rates, such homes have a high degree of affordability.

Another option may be a Title I home improvement loan. Borrowers can get up to $25,000 with such financing. The loan term is as much as 20 years for a single-family residence on a permanent foundation but 12 years for homes which are classified as personal property rather than as real estate. As an alternative, financing for manufactured homes for as long as 30 years is also available.

While small homes are not for everyone, they offer a new and growing housing option in the marketplace, one that may cost not more than a good car. In an era of tight budgets, frequent job changes and steep housing costs, a micro-house may be a better real estate solution for some than inter-generational housing with mom and dad or an affordable property that requires a two-hour commute.